Gross margin

Gross margin is the difference between revenue and cost of goods sold, or COGS, divided by revenue, expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, not including indirect fixed costs like office expenses, rent, or administrative costs). Gross Margin is often used interchangeably with Gross Profit, but the terms are different. When speaking about a dollar amount, it is technically correct to use the term Gross Profit; when referring to a percentage or ratio, it is correct to use Gross Margin. In other words, Gross Margin is a % value, while Gross Profit is a $ value.

Gross Margin is a type of profit margin, specifically a form of profit divided by net revenue: for example, gross (profit) margin; operating (profit) margin; net (profit) margin; etc.

The purpose of margins is "to determine the value of incremental sales, and to guide pricing and promotion decision."

"Margin on sales represents a key factor behind many of the most fundamental business considerations, including budgets and forecasts. All managers should, and generally do, know their approximate business margins. Managers differ widely, however, in the assumptions they use in calculating margins and in the ways they analyze and communicate these important figures."

Gross margin can be expressed as a percentage or in total financial terms. If the latter, it can be reported on a per-unit basis or on a per-period basis for a company.

"Margin (on sales) is the difference between selling price and cost. This difference is typically expressed either as a percentage of selling price or on a per-unit basis. Managers need to know margins for almost all marketing decisions. Margins represent a key factor in pricing, return on marketing spending, earnings forecasts, and analyses of customer profitability." In a survey of nearly 200 senior marketing managers, 78 percent responded that they found the "margin %" metric very useful while 65 percent found "unit margin" very useful. "A fundamental variation in the way people talk about margins lies in the difference between percentage margins and unit margins on sales. The difference is easy to reconcile, and managers should be able to switch back and forth between the two."

"Every business has its own notion of a 'unit,' ranging from a ton of margarine, to 64 ounces of cola, to a bucket of plaster. Many industries work with multiple units and calculate margin accordingly. . . . Marketers must be prepared to shift between varying perspectives with little effort because decisions can be rounded in any of these perspectives."

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